Which of the following statements is false? O A moving average for a time period

Question

Which of the following statements is false? O A moving average for a time period is the simple arithmetic average of the values in that time period and those close to it O A value of the smoothing constant w close to 1 results in a very large smoothing, whereas a value of w close to zero results in very little smoothing. O The accuracy of the forecast with exponential smoothing decreases rapidly for predictions of the time series more than one period into the future A moving average "forgets" most of the previous time-series values and is considered a relatively crude method of removing the random variation.

Explanation / Answer

B is false

Unlike moving average models, which use a fixed number of the most recent values in the time series for smoothing and forecasting, exponential smoothing incorporates all values time series, placing the heaviest weight on the current data, and weights on older observations that diminish exponentially over time. Because of the emphasis on all previous periods in the data set, the exponential smoothing model is recursive. When a time series exhibits no strong or discernable seasonality or trend, the simplest form of exponential smoothing – single exponential smoothing – can be applied. The formula for single exponential smoothing is:

t+1 = Yt + (1-) t

In this equation, t+1 represents the forecast value for period t + 1; Yt is the actual value of the current period, t; t is the forecast value for the current period, t; and is the smoothing constant, or alpha, a number between 0 and 1. Alpha is the weight you assign to the most recent observation in your time series. Essentially, you are basing your forecast for the next period on the actual value for this period, and the value you forecasted for this period, which in turn was based on forecasts for periods before that.

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